Capital Structure and the Performance of Deposit Money Banks in Nigeria

Abstract

Corporate entities all over the world are faced with the problem of determining appropriate finance that will boost the value of the entity and maximize the wealth of shareholders. However, for overall wealth of shareholders to be met and consistent increase in value of Banks to be achievable, capital either debt in form of customers deposit or equity capital raised from investors is inevitable. The paper examines the relationship that exists between capital structure and financial performance and also investigates the effect of capital structure on the financial performance of quoted deposit money banks in Nigeria. To achieve these, a cross sectional time series secondary data covering the period of seven years (2015-2021) was extracted from the audited financial statement of ten (10) banks listed on the floor of Nigerian stock exchange. The descriptive statistics, Pearson moment correlation and multiple linear regressions were used. The correlation results showed that capital structure is negatively correlated with financial performance (ROA and ROE). Result from panel regression revealed that debt to equity though significant, impacted negatively on return on assets and return on equity (β = −0.1266, ρ < .01; β = −5.3571, ρ > .01) , asset tangibility significantly impacted return on asset but insignificantly impacted return on shareholder’s equity (β = −0.0235, ρ > .05; β = −0.3527, ρ > .10) and also Age have a significant impact on return on asset and insignificant effect on return on equity (β = −0.0141, ρ < .01; β = −0.1497, ρ > .10). This study therefore concludes that capital structure have a negative effect on the financial performance of deposit money banks in Nigeria and recommended that appropriate proportion of capital should be tailored towards viable investment opportunities for maximum return of  shareholders wealth and increase in value of the firm. More so, while finance managers are alert to the movement in the stock market, banks should take precautionary measures for mitigating credit risk associated with lending and borrowing.

Keywords: Debt to equity, assets tangibility, age of banks, return on equity, return on assets, Capital Structure